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Blown Healthcare Budgets Put Sustainability at Risk

April 30, 2019 – Growth in healthcare spending by provinces and territories has been accelerating over the last four years as governments continue to overshoot their budget targets, says a report from the C.D. Howe Institute. In “Healthcare Spending Overshoots a Threat to Sustainability,” author William B.P. Robson warns that, while governments are typically budgeting growth in healthcare budgets that should be fiscally sustainable, actual growth in healthcare costs is outrunning what Canada’s economy and tax base can support over the long run.

Robson notes, for example, that the preliminary number in the Canadian Institute for Health Information’s annual National Health Expenditure (NHEX) report for overall growth of healthcare expenses is 3.8 percent in 2018 – in line with most estimates of potential GDP growth. But an upward revision typical of past performance would put the final 2018 figure at 4.6 percent – faster than potential GDP growth and prefiguring some combination of rising taxes, more borrowing and squeezes on other government programs.

The C.D. Howe Institute report provides a reality check on the initial estimates of provincial and territorial government in the NHEX. “These figures reflect only intentions as reflected in budgets,” says Robson. “Past history tells us that the revised, actual figures are typically materially higher.”

Over the NHEX reports’ 20-year history, the later numbers on average have shown provincial and territorial health expenses growing 0.8 percent annually faster than the preliminary estimates. Overshoots that large across the country, year after year, affect judgments about whether publicly funded healthcare is fiscally sustainable.

“If governments had actually spent what their preliminary numbers indicated, their current healthcare spending would be $29 billion lower – more than half of provincial healthcare spending in Ontario – than it is,” notes Robson.

Experience by Jurisdiction: The report provides insights into the nature of the overshoots from 2014 to 2017 by looking at the provincial and territorial experience during those years. While overshoots are more common than undershoots, they are not universal, and their size varies markedly. (See Figure 2 in report.)

The Atlantic region presents a frugal picture. The preliminary numbers for all four provinces prefigured spending increases of about 2 percent, and the later numbers show minor overshoots and undershoots. Perhaps the chronic fiscal pressure afflicting these provinces has prompted both conservative budgeting and relatively tight expenditure management.

The preliminary numbers from Quebec suggested modest increases, but the later numbers show a startling overshoot. Ontario’s preliminary numbers suggested even more modest increases, with the later numbers showing a typical overshoot of 0.8 percent annually.

Preliminary numbers west of Ontario generally suggested larger increases, which later numbers confirmed and then some, with overshoots everywhere but Manitoba. Better-than-expected resource revenues likely led some of these governments to relax their budget targets and their spending controls.

While Nunavut’s preliminary numbers showed a decline, all three territories’ later numbers displayed large increases and overshoots.

The report also provides a breakdown of over- and under-shoots by use of funds, from hospitals and doctors to public health and drugs.

Overall, the upward revisions in spending reflect a tendency for governments to overshoot their budget targets generally and in health-related programs particularly, says the report. Ensuring that publicly funded healthcare is fiscally sustainable will require better spending discipline overall and changes to better align the activities of managers, providers and patients with our capacity to pay.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review